The U.S. Securities and Exchange Commission (SEC) on Wednesday approved exchange-traded funds (ETFs) that track the price of bitcoin in a game-changer for the cryptocurrency industry which has been trying for more than a decade to launch such a product.

Multiple asset managers have applied for bitcoin ETFs since 2013, but the SEC rejected them on the grounds they would be vulnerable to market manipulation. In August, however, a court found the SEC was wrong to reject Grayscale Investments' bitcoin ETF application, forcing the agency to rethink its stance.

On Wednesday, SEC approved applications from ARK Investments, BlackRock and Fidelity, among others. Here is how the products work and why the approval is seen as a big deal:

HOW WILL THE ETFS WORK?

They will be listed on Nasdaq, NYSE and the CBOE. Their assets will comprise physical bitcoin purchased from crypto exchanges and held via custodians like Coinbase Global.

The products track a bitcoin benchmark. Some track an index provided by CF Benchmarks, a subsidiary of crypto exchange Kraken, which aggregates trading data from multiple Bitcoin-USD markets operated by big cryptocurrency exchanges.

To address the SEC's manipulation concerns, Nasdaq and CBOE have created a market surveillance mechanism with Coinbase, the largest U.S. cryptocurrency exchange.

Issuers plan to charge fees ranging from 0.20% to 0.8%, well below the broader ETF market average.

IS IT DIFFERENT TO BUYING BITCOIN OUTRIGHT?

Yes. A spot bitcoin ETF allows investors to gain exposure to the price of bitcoin without the complications and risks of owning bitcoin directly. Those include setting up crypto wallets and accounts with crypto exchanges, some of which have poor cyber security records and are prone to hacks. The industry has also experienced a string of bankruptcies and scandals, including the implosion of crypto exchange FTX, whose founder Sam Bankman-Fried was found guilty of fraud. Other exchanges have been accused of flouting U.S. securities laws, while Binance, the world's largest crypto exchange, recently pleaded guilty to breaking U.S. anti-money laundering laws. All this continues to make many investors wary.

In contrast, ETFs are listed on tightly-regulated stock exchanges and are therefore accessible through retail investors' existing brokerage accounts, which are also closely supervised.

The ETF structure also boosts the accessibility of bitcoin for institutional investors, some of whom are barred from investing directly in alternative assets.

WHY IS IT DIFFERENT TO EXISTING BITCOIN FUTURES ETFS?

The SEC in 2021 approved bitcoin futures ETF, which track agreements to buy or sell bitcoin at a pre-agreed price. But those products don't track price movements precisely, and the cost of rolling over futures contracts can eat into returns, making them less desirable for many investors.

AREN'T THERE SPOT BITCOIN ETFS IN CANADA AND EUROPE?

Yes. But the United States is the world's largest capital market, home to some of the globe's largest asset managers and institutional investors.

HOW MUCH WOULD A BITCOIN ETF REEL IN?

It's unclear. The ProShares Bitcoin Strategy ETF, the first bitcoin futures ETF approved by the SEC in 2021, saw around $1 billion worth of shares trading hands on its first day, and some experts believe a spot bitcoin ETF could net three times that much on its first day. That figure could balloon to $55 billion over five years, some expert estimate. While bitcoin has gained 70% since the Grayscale ruling, analysts said it was unclear how much further it would rise, with some saying interest rates would play a bigger role.

BUT IT'S NOT JUST ABOUT THE MONEY

For the crypto industry, a spot bitcoin ETF is a big win, boosting the legitimacy of the cryptocurrency industry and pushing bitcoin further into the mainstream.

It also comes amid a broader tug-of-war between the crypto industry and SEC, which has been cracking down on the sector. When it comes to this particular battle, the industry can claim victory.

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